Bombay High Court Directs Liberal Interpretation of 'Genuine Hardship' Under S.119(2)(b) and Mandates Timely S.154 Disposal - 2024-04-10

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Bombay High Court Slams Tax Authorities Over Delay in Rectification and Narrow View on 'Genuine Hardship'

Mumbai: The Bombay High Court has quashed an order by the Central Board of Direct Taxes (CBDT) that rejected an application for condonation of delay, holding that the tax authorities must adopt a liberal approach when interpreting 'genuine hardship' under Section 119(2)(b) of the Income Tax Act, 1961. The court also expressed strong disappointment with the Assistant Commissioner of Income Tax (ACIT) for failing to decide a rectification application pending for nearly six years, directing disciplinary action.

The judgment was delivered by a bench of Justices K. R. Shriram and Dr. Neela Gokhale on April 8, 2024, in the case of Pankaj Kailash Agarwal vs. Assistant Commissioner Of Income Tax Officer, 17(1) Mumbai & Ors. (Writ Petition (L) No. 7783 of 2024).

Background of the Case:

The petitioner, an individual operating an industrial unit, had claimed a deduction under Section 80-IC of the Act for Assessment Year 2016-17. He filed his return of income before the due date and obtained the necessary audit report in Form 10CCB. However, during processing under Section 143(1), the deduction was denied. The intimation did not state the reason, but the petitioner's Chartered Accountant later realized that the Form 10CCB had not been uploaded online due to inadvertence.

The petitioner filed a rectification application under Section 154 of the Act with the ACIT in April 2018 to correct this apparent mistake. Despite repeated reminders, this application remained undecided for almost six years. The petitioner's subsequent application for revision under Section 264 was dismissed on limitation grounds.

Left with no other recourse, the petitioner approached the CBDT under Section 119(2)(b) to condone the delay in uploading the form and direct the ACIT to grant the deduction. The CBDT rejected this application, stating that the reason (inadvertence of auditors) was too general and did not show 'genuine hardship'. This led the petitioner to file the writ petition before the Bombay High Court.

Petitioner's Arguments:

The petitioner contended that the denial of the Section 80-IC deduction due to the Chartered Accountant's inadvertence was a technical error that should not penalize the assessee. They argued that engaging a professional and receiving the audit report on time showed diligence. Reliance was placed on judicial precedents asserting that the filing of Form 10CCB is directory, not mandatory, and that an error by a professional should not prejudice the assessee.

Crucially, the petitioner argued for a liberal interpretation of 'genuine hardship' under Section 119(2)(b), stating it should not be restricted to cases of 'severe financial crises'. They submitted that losing a statutory benefit, especially after making significant investments based on the expectation of such benefits, itself constitutes genuine hardship. The petitioner also raised a procedural challenge, arguing that the CBDT's rejection order, merely issued with approval of a Member but not authored and signed by the Member who gave a personal hearing, was invalid based on previous High Court rulings.

Revenue's Stand:

The respondents largely reiterated the grounds stated in the impugned CBDT order, asserting that the petitioner had failed to demonstrate 'genuine hardship' beyond a general reason for the delay.

Court's Analysis and Rulings :

The High Court came down heavily on both the CBDT and the ACIT.

On the issue of 'genuine hardship', the bench explicitly agreed with the petitioner, citing several previous judgments of the Bombay High Court, including Sitaldas K. Motwani , R. K. Madhani Prakash Engineers , and K. S. Bilawala . The court reiterated that:

• 'Genuine hardship' must be construed liberally.
• The power to condone delay is conferred to enable authorities to do substantial justice.
• An applicant seeking condonation of delay ordinarily does not stand to benefit by lodging a claim late.
• Refusing to condone delay can defeat the cause of justice by throwing out a meritorious matter at the threshold.
• Paying more tax than one is liable to pay constitutes 'genuine hardship'.
• Authorities should adopt a justice-oriented approach.

The court found the CBDT's rejection order to be based on a "pedantic and narrow interpretation" of 'genuine hardship', unwarranted by law.

Furthermore, the court strongly criticized the CBDT's procedural lapse in passing the order. Noting its previous directions in R. K. Madhani Prakash Engineers and TATA Autocomp Gotion Green Entergy Solutions Pvt Ltd. , the bench stated that orders on such applications (especially exceeding a certain threshold) must be considered by the Board and the order must be written, authored, and signed by the Member who granted a personal hearing. The current order, merely stating "issued with the approval of Member", showed "utter disregard that the CBDT has for judicial orders". The court directed a copy of the order be sent to the Chairman of CBDT for suitable action.

Regarding the ACIT's conduct, the court expressed "disappointment" that the rectification application under Section 154, filed in April 2018, remained undecided. The court dismissed the ACIT's submission in the affidavit that there was "no mistake apparent from record" as baseless, stating that the ACIT was "duty bound to pass orders" instead of offering such excuses after almost six years. The bench directed the Principal Chief Commissioner of Income Tax (PCCIT) to take disciplinary action against the ACIT for "dereliction of duty".

Decision and Directions:

Based on its findings, the High Court:

1. Quashed and Set Aside the impugned CBDT order dated September 1, 2023.
2. Directed the CBDT to reconsider the petitioner's application under Section 119(2)(b) afresh, ensuring the order is written, passed, authored, and signed by the Member who provides a personal hearing after furnishing relevant reports to the petitioner.
3. Directed the ACIT (Respondent No.1) to dispose of the pending rectification application under Section 154 on merits on or before May 31, 2024 , after giving a personal hearing to the petitioner.
4. Directed the PCCIT to take disciplinary action against the ACIT for the delay in deciding the Section 154 application.
5. Directed a copy of the order be sent to the Chairman of CBDT for compliance with judicial directions on order formatting.

The petition was accordingly disposed of. This judgment reinforces the principle that technicalities should not defeat substantive justice and puts tax authorities on notice regarding administrative delays and the need for a fair and liberal approach in granting relief where genuine hardship is demonstrated.